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In truth, no one really knows, but there are perhaps some inferences that can be drawn from Wednesday’s remarkable result.
Infrastructure spending has been the issue that has emerged over the past day as the reason for a big bounce in US stocks. Trump’s career has been about building, so he is likely to carry this over into his new job. Infrastructure spending is something that many Democrats are keen on too, so he might have a relatively easy time passing this one through Congress. Thus construction and engineering companies look like a potential play over the longer-term, and not just in the US, an issue we discuss in more detail here.
Higher spending, combined with the tax cuts the president-elect has talked about, could see bond yields start to rise. It is an old-fashioned view of the world, one which has been out of favour in a time dominated by central bank policy, but a borrowing binge could see investor appetite for bonds diminish, pushing down prices and sending yields higher.
Inflation is another supposedly defunct concept that is due a rebirth. Globalisation and free trade has helped push down the prices of consumer goods and services. It is too early to say whether President Trump will follow through with his desire to renegotiate trade deals, but higher inflation is now a definite possibility in a way which seemed unlikely a few days ago. As we have seen with Brexit, a falling currency raises the prospect of importing inflation, so US CPI could be at the start of a long-term move higher.
Higher inflation means US rates could rise more quickly than many thought possible. Yellen is no longer quite the mistress of her own destiny, with her reappointment in 2018 now in doubt. A hawkish Federal Reserve president could set the US on course for higher interest rates, particularly given Trump’s known antipathy towards the current policy direction of the US central bank.
Finally, we should spend some time thinking about China. The Chinese currency has been moving lower lately, a continuation of the trend that has been in place since the beginning of the year. The People’s Bank of China has succeeded in steadying the Chinese economy, but Trump’s threats to put pressure on Beijing mean the Chinese may look to push their currency yet lower in a bid to steal a march on the new administration and any tariffs they may impose.